Healthcare offers robust rewards for discerning pickers

To say companies in the healthcare ­sector are fit and growing is to acknowledge that people are sick and dying.

But if Australia’s providers of medical care, pharmaceuticals and procedures have glowing prospects, it is because more people around the world will be able to afford to treat the ills of modern life that creep up on them. Companies with offshore operations will also benefit as the dollar falls.

Valuing stocks in the sector is a challenge, and business analysts must confront their fear of looking over scientific papers and admitting they don’t understand a word. Among retail investors, those with PhDs might have a chance.

“You can’t just go into [health] blindly because it is littered with high-risk enterprises," says Lincoln Indicators CEO
Elio D’Amato
. Regardless of that, Lincoln has high expectations for the sector and favours six ASX-listed constituents. Some valuations are lower than current share prices, an indication the company has a reputation for exceeding expectations.

The blood plasma company is a major player in the US and is making inroads into Japan, says Lincoln head analyst Dennis Ng. Because of the scale of
CSL
’s operations, he says it should incur low costs in R&D. “Getting additional products out of . . . blood is effectively free, apart from the processing costs," says Ng, who expects a strong outlook for the core blood plasma business, CSL Behring, to balance volatility in other parts of the company.

Related Quotes

Company Profile

The private hospital operator has better prospects for growth offshore than at home, Ng says. “Its first port of call was the UK and it’s really done a good job," he says.
Ramsay
is the third-largest private hospital operator in France, “and that’s just the start". The group may need to increase debt to expand into new markets, but Ng isn’t concerned. “When you operate hospitals, it’s sort of like operating supermarkets," he says. “You can afford to borrow a lot because your income levels are so stable."

Lincoln’s valuation: $43.05.

The liver cancer treatment company has had success with clinical trials over the past few years, which has led to dramatic share price gains as awareness of its product has been reflected in sales. “Patients are very reliant on their oncologists for recommendations," Ng says.
Sirtex
is hoping to extend beyond liver cancer treatment, although Ng says “it will take a long while before that happens". Manufacturing in the US and Singapore has improved distribution.

Lincoln’s valuation: $13.42.

Capitol Health
provides diagnostic imaging services such as X-ray, ultrasound and MRI scans to independent medical practitioners. Last year regulations were changed allowing GPs to refer patients for MRIs for some procedures without having to see a specialist. The government’s Medicare rebate on MRI scans is above the cost of providing the service, Ng says, “so even when you bulk bill you’re making quite a bit off it".

Lincoln’s valuation: 50¢.

Vitamin supplement company
Vita Life
has carved out a niche in Asia, Ng says. He expects business there will grow as consumers focus on health and levels of disposable income rise. “But we have some concerns [about some markets]," he says. “It can be very competitive because of imitation products, so there is some element of risk."

Lincoln’s valuation: $1.68.

With three-quarters of its operations in the US, Ng suggests a reduction in healthcare services there may show up in tighter margins for
ResMed
. If lower rebates flow to buyers of sleep apnoea products, they may turn to cheaper competitors. “There is some talk [it] might be lowering the price points."